IMF Bails Out Ukraine...and Franklin Templeton?

♠ Posted by Emmanuel in ,, at 3/30/2014 11:02:00 AM
With some foreign currency savings in the bank, I have been in the market for a better return than a time deposit. I was thus offered some mutual funds that are becoming quite popular with retail clients looking for a boost in their returns. Being a conservative investor, I am interested more in fixed income than equity funds. As you probably know, Franklin Templeton is one of the United States' largest asset managers, with holdings nearing an astronomical trillion.

For one reason or another, I was offered the Franklin Templeton Global Return Fund co-managed by the fellow above who explains when to invest after an emerging markets selloff, Michael Hasenstab. Just as sports fans talk about star athletes, investors apparently talk about star managers like him. Indeed, on the surface, this fund appears to be attractive: it is rated by Morningstar as a five-star fund. This means that for its risk category, the fund has been in the top tier in terms of returns. Doubtlessly, many investors would have plunked their money down at this point--big-name investor, well-known fund manager and top-rated fund.

However, I practice what I preach in not trusting the ratings, preferring to look for myself what is inside this fund. As it turns out, this fund has holdings in Venezuelan state-owned oil company PDVSA [!], Argentina government bonds [!!], and a boatload of Ukraine government bonds [!!!] Suffice to say, I said "No sale." Franklin Templeton is known for a contrarian style as it looks to invest in oversold and hence undervalued (AKA "distressed") assets it believes have been unwisely shunned by others. Another Franklin Templeton star of Bloomberg and CNBC fame, Mark Mobius, explains the fate of Ukraine:
While global escalation of the current conflict remains a possibility in Ukraine, we think this is unlikely as it is in the interest of all parties to have a unified and stable Ukraine. There are four sources from which financial support for Ukraine could come: the EU, the US, Russia and the International Monetary Fund (IMF).
To me. what's noticeable is just how risky Franklin Templeton's investment is: they were relying on a white knight to come to Ukraine's rescue. If you want some real "masters of capital," consider that Franklin Templeton piled on so much that they recently held over a third of all Ukraine's publicly-held debt:
Franklin Templeton, the global fund management group, has suffered losses on multibillion dollar positions in Ukrainian debt. Ukrainian bond yields, which have an inverse relationship with prices, have risen sharply in response to instability in the country as concerns have mounted that it is heading for civil war.

Overall, Franklin Templeton holds about $6.4bn, more than a third of the country’s international dollar bonds, according to filings. Some of the group’s biggest funds bought Ukrainian bonds at the end of last year, before the violence sparked the strong swings in the market, according to Bloomberg data.
You can thus argue that Franklin Templeton was saved by the IMF. Yes, its portfolio would not have been significantly damaged otherwise given the sheer size of its holdings, but there would have been significant, ah, "impairment" nonetheless. Reputation damage, too. The argument that the IMF serves American interests--still its largest shareholder--is an old one. For what it's worth, the IMF has not yet asked for Ukraine's creditors for changed terms, but they may still be on the cards:
[The IIF's] Mr. Mitov just returned from a trip to Ukraine, where he met with government and fund officials. Maturity extensions would push around $9 billion in debt due through 2016 into the future, without cuts in the face value of the bonds investors hold, he said.

“This is a much bigger cash-flow relief with much less pain and much less damage” to Ukraine’s economy than the type of “haircut” required in the Greek bond haircut, Mr. Mitov said. A bond maturity extension would also allow for a more gradual budget belt-tightening for Ukraine than currently needed.
As for me, I think I'll stick with less "exciting" investments than these, thank you.